Editor’s note: Richard Lim gave a sweeping assessment of Hawaii’s economic situation in a June 2 speech to the Hawaii Economic Association. His remarks are excerpted below.

What I hope to convey to you is the seriousness of our fiscal situation. We are all aware of the current $1.3 billion shortfall. But, most of us attribute it solely to our sluggish the economy. Unfortunately, the problem is much deeper. The State has systemic budget challenges that result from existing obligations, a high level of debt and an aging population.

Many still believe that tourism alone can solve our problem. They are wrong; as tourism has been essentially flat for decades. We need growth. Since it is unlikely that we can tax and cut our way to prosperity, we need a new economic model that will generate higher levels of sustained growth. The Governor has a comprehensive plan to put the State back on the right track and DBEDT will play a key role, but it will require substantial private sector participation and a new way of looking at our economy.

Even after the economy recovers, we will be faced with significant challenges. The reason is quite simple. We have an aging population that requires more resources. The Lingle administration made substantial cuts in government. Despite these cuts, the State budget grew by roughly 5% per year under the Lingle administration.

And, the problem is likely to get much worse before it gets better. At the national level, we are concerned about Social Security. When Social Security was first established, the ratio of workers to retirees was roughly 6-1. Today, it is roughly 3-1 and many in Congress are calling for a revamping of the system. In Hawaii, we have roughly 66,000 active employees supporting 38,000 retirees. That’s a ratio of 2-1 and we have 13,000 employees that are fully vested and can retire tomorrow. That brings us to a ratio of 1-1. The ERS has a current unfunded liability of $8-9 billion.

The EUTF – Employees Union Trust Fund, which is the trust fund for medical benefits, is equally challenged with a deficit of $12-16 billion.

In addition to this unfunded liability, Hawaii has the highest level of debt as a percentage of personal income in the US, with a 9.9% level versus a national median of 2.5%; and our $4,000 of debt per capita is the 3rd highest in the nation and compares with a national median level of a little over $900.

When faced with a budget crisis, our first reaction is to turn to the tourism industry. Yes, it does look like tourism is on the rebound and the Japanese market has bottomed, but tourism has been experiencing slow growth for 20 years with the exception of 2005-2007 when we had a boost from the cruise ships coupled with the housing and stock market bubble.
As an example, the number of hotel rooms has actually shrunk in the past 20 years.
The number of nonstop scheduled air seats to Hawaii has grown somewhat but not nearly enough to keep pace with our growing State obligations.

First time visitors dropped from 77% in the 1950s to 34% last year. This is a common pattern for any mature industry, and it’s a poignant reminder that we need to keep our product fresh. Surveys have shown that this does not just mean improving the hotels, shops and restaurants. Tourists are looking for new experiences, and that means we need to maintain the strong cultural content that defines us as a visitor destination.

Real visitor spending has been declining as a percent of real GDP for the past 20 years. It peaked in 1988 at 30.3% and stood at 16.4% in 2010.

Over the years, and especially in the past two years, thanks to Senator Inouye, the Congressional team and the stimulus, federal expenditures have been a major boon for the State. However, a significant portion of this funding comes in the form of grants which are not included in our GDP numbers and are arguably not as sustainable as operating expenditures. …The long-term trend of federal spending is positive but not robust.

The core of military spending represented by federal military personnel has been flat and has not breached the 40,000 level for more than 20 years. The slight increase in personnel in recent years is due to the Iraq War.

To recap, while our economy is clearly on the upswing, the State has major structural issues that will demand increasingly greater resources. We cannot rely on our two most important industries, tourism and the federal government, to create the requisite growth to cover our ever-increasing systemic costs.

We need to diversify our economy and foster new industry clusters that can generate growth.

The Governor has laid out a comprehensive plan to set us on a growth trajectory, called a New Day in Hawaii. It acknowledges the challenges we face as a community and outlines a creative way of addressing our problems and laying the groundwork for our future, provided that we are all willing to sacrifice and contribute.

We believe that DBEDT should place special emphasis on three key areas of the New Day in Hawaii plan.

First, we will help to make better use of the State’s land resources; second, we will build the key components of an infrastructure that will allow us to remain competitive in the 21st century; and third, we will support industry clusters that have high growth potential.

We selected these three initiatives because they are big issues that directly or indirectly affect virtually every business and we believe they have the core competency to make a difference.

Land

Why Land?
It’s very simple. The State budget will be under continuous strain for the foreseeable future. When the legislature is faced with a deficit, balancing the budget comes down to short-term priorities and economic development is weighed against feeding the hungry, sheltering the homeless and educating our youth.
The State has vast land resources which currently represent a drain on the State’s coffers due to heavy maintenance costs. We cannot afford to pay for adequate upkeep so facilities are in disrepair and, consequently, become underutilized. Most residents don’t use them which often results in them attracting undesirable elements.
By engaging in public-private partnerships, we hope to turn this situation around. We will find private sector partners who are willing to make the requisite investments to renovate and revitalize our underutilized lands.
There are a number projects that can improve our infrastructure and provide improved facilities for the enjoyment of locals and tourists. And, partnering with the private sector minimizes the need for State funding or additional personnel.
Of course, there will always be the vocal minority that will object. Think of the super ferry. And, there have been other projects that have been derailed by well heeled NIMBY’s and special interests. While I am all for protecting the environment, we need to strike a balance. We can do responsible and sustainable development.

Energy

Why Energy?
Well, the Governor talks about how renewable energy production provides us energy security. He talks about all the jobs it will generate (roughly 14,000 to date) and how we are building a new industry that is a model for the nation. He extols the value of import substitution because the dollars that would normally leave the State stay here to circulate and grow. All of that is true, but from my perspective it’s much more basic.
High energy prices drive up the cost of doing business and affect everyone’s bottom line. It’s a hidden tax. And, it’s not just in your utility or gas bill, it’s embedded in all of the products and services we buy. Simply put, we cannot afford uncontrolled energy prices.
In 2008, the Legislature passed landmark legislation called the Hawaii Clean Energy Initiative. Under this initiative, which is a public-private partnership that has attracted international attention, Hawaii’s goal is to transform how we produce, distribute and use energy so that by 2030, 70% of our energy is from renewables or energy efficiency.
As you can see from the chart, we are on track to achieve our goals for 2015. However, the goal of 25% by 2020 is highly problematic.

Oahu accounts for most of our energy needs while the neighbor islands have most of the renewable resources. These valuable resources will be wasted unless we can transmit them to Oahu.
This is why we are advocating the construction of an undersea cable to connect the islands with energy and broadband. Having an integrated grid is the only way to insure energy security for Hawaii and to allow the neighbor islands to harvest their wealth of renewables.

In just two years, Hawaii has become a national leader in both photovoltaic watts per capita and solar water heaters per capita; and we are 2nd in the nation in power purchase agreements. There are already dozens of local companies as well as an impressive cadre of national and international companies engaged in renewable energy production and energy efficiency. In our Asia Pacific Clean Energy Summit, which DBEDT is hosting in September, we are expecting companies from 20 nations to participate.
What all this says is that, when we put our minds to it and we get buy-in from both the public and private sectors, we can be successful, and, in fact, we can be a national leader.

We would like to use our experience in energy as a model for building our broadband infrastructure.
Why broadband? Communication links in the 21st century will be just as important as transportation was in the 20th century. In fact, in places like Costa Rica they are laying cable under dirt roads. Can you imagine? They are prioritizing broadband over paved roads.
And for Hawaii, as the most isolated, populated land mass in the world, broadband is even more critical. One of our biggest disadvantages is our lack of proximity to markets, but with broadband we now have access to world markets.
And, I am not just talking about the tech industry.
In fact, how many of you do not use the internet in your business?
Ten years ago, Hawaii used to be a national leader in broadband. Now we rank 31st in the nation in internet speed. Not too bad except that the U.S. ranks 15th in the world and we are in a global marketplace.
A while ago, Google held a national contest which Kansas City won. It is to provide 1 gigabit of service to every household in the entire community.
That is roughly 200 times our average internet speed in Hawaii. Sounds incredible but if Moore’s law holds true, this will be the norm within 10-12 years. After all, it was only about a dozen years ago that dial-up was the norm and AOL was king.
So, we have a long way to go and we better move fast. Thanks to the University of Hawaii, Hawaii won a federal grant that will allow us to bring broadband to all of our schools and libraries. That’s a great start that we plan to build on.

High Growth Industries

High Growth Industries – I hope I made the case for energy and broadband infrastructure.
The third leg of our strategy, to support creative and knowledge intensive industries, is equally important but not as obvious.
Some people believe all we need to do is to support tourism and that doing anything else will cause us to take our eye off the ball. They see this as an either/or situation. It is not.
Tourism will always be our anchor, but, it’s becoming increasing evident that even tourism needs the creative industries. Surveys tell us that tourism is no longer simply a matter of sun, sand and surf. It’s about experiences. And, a large part of that experience involves culture and art and entertainment, all of which are part and parcel of the creative industries which now represent almost 6% of our economy. Disney’s new Aulani Resort is a great example: it’s more than a hotel with nice pools, it’s an entertainment experience. In a recent recruitment ad, Disney was seeking “cast members,” who could convey a “sense of place” and tell the “stories of Hawaii.” Sounds more like the central casting for a movie than a recruitment for hotel workers.
And, who can deny the value of Hawaii Five-0 in terms of marketing Hawaii?

High Growth – Knowledge-Intensive
The importance of knowledge-intensive industries is even more compelling but making the case for them is equally problematic. In fact, many people believe that, by their nature, high tech companies are destined to leave the State because they need heavy doses of capital and management. But, what high growth company is not in the same boat?
Yet, there are a host of bright stars, right under our noses. Let me give you just three examples. Decongel, a product made in Hawaii, has gained international attention due to its efficacy in cleaning nuclear waste in Japan. In fact, it was recently featured on CNN. And then, there is Referentia, a company with a long history in Hawaii that is one of the leaders in cyber security. And finally, there is Hawaii Biotech, which recently sold its Dengue fever vaccine to Merck.
Knowledge-intensive industries are much more than the sum of the companies that comprise these industries. Technology and innovation are at the core of virtually all growth strategies for all companies. And, having a strong ecosystem of knowledge-intensive companies creates a labor pool that can be tapped by the rest of the economy; a valuable resource which is unquantifiable but undeniable.
I hope that I have made the case for the importance of building a 21st century infrastructure and taking another look at the way we view our economy. Rather than discrete industries, we need to think in terms of clusters or ecosystems; and, regardless of what ecosystem you believe can drive sustained growth, I‘d be willing to bet that knowledge and creative elements are critical to its success in the 21st century.
Some people might say, why not just double-down on real estate and retailing, which have been strong drivers for our growth in the past? The problem with these industries, and others including banking and insurance, is that they are what are referred to as derived industries. That is why we are focusing on industries that are involved in export or import substitution. They bring in money to the State which then circulates and multiplies and supports our derived industries.

In the next decade, more and more of our business activities will converge as the market will require ever increasing degrees of technology and creativity to compete. In the near future, it will not make sense to think in terms of industries, but more in terms of skills and core competencies. Isn’t it about time that we started looking at the world from a 21st century perspective?

We have set priorities that we believe address big issues that affect most, if not all, businesses and have the capacity to stimulate growth in our economy.

While we have 3 key priorities: making better use of our land, building a 21st century infrastructure, and supporting high-growth industry clusters, they all have one thing in common — they all require private sector participation.
What I’d like to end with is one thought. It’s not about DBEDT or government. Economic transformation is about you, the private sector. In all successful efforts in the US, it was the private sector that led the way. The same is true for all of DBEDT’s initiatives. Yes, we will be a willing partner, but it cannot happen without your help.

About the author: Richard Lim is the director of the Hawaii state Department of Business, Economic Development and Tourism. Its mission is “to support business, create jobs, and improve Hawaii’s standard of living by diversifying the economy, expanding existing businesses, and attracting new economic activity.”